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Phase 4: Three stages to EMU

For economic and monetary union to provide a framework for more jobs and growth and to avoid disruption, it was necessary for the Member State economies to have achieved a high degree of convergence before introducing the single currency.

From Maastricht to the euro and the euro area, 1991 to 2002

The Treaty on European Union set the ‘Maastricht convergence criteria’ that Member States would have to meet in order to adopt a single currency. In addition to these criteria, Member States would have to align the national laws and rules governing their national central banks and monetary issues.

The Maastricht convergence criteria were designed to ensure that a Member State’s economy was sufficiently prepared for the adoption of the single currency. They provided a common baseline indicator of the stability, soundness and sustainability of Member State public finances that reflected economic policy convergence and a resilience to economic shocks.

With agreement on the goal (Economic and Monetary Union – EMU) and the conditions (the Maastricht criteria), the European Union could now move forward. Stage one of EMU, the completion of the single market, was a reality by 1 January 1994, when capital markets were liberalised. Stage two of EMU then began and lasted until the introduction of the single currency in 1999. Within stage two, a wide variety of preparatory activities were initiated:

  • The European Monetary Institute (EMI) was established in Frankfurt in 1994. The forerunner of the European Central Bank, the EMI began to coordinate monetary policy among the national central banks, which the Maastricht Treaty required to be independent, as well as working on the details of the single currency.
  • Between 1994 and 1998, Member States made significant progress in economic policy convergence and took steps to align their budgetary positions with the Maastricht criteria.
  • The 1995 Madrid European Council agreed on the name for the new currency – the euro – and set out the scenario for the transition to the single currency that would start on 1 January 1999.
  • In 1996, the EMI presented the winning designs for the euro banknotes and, in 1997, the Commission did the same for the common sides of the coins. The 1997 Amsterdam European Council agreed the rules and responsibilities of the Stability and Growth Pact (SGP) which aims to ensure fiscal discipline under EMU. The European Commission was given the key responsibility of monitoring adherence to the SGP.
  • In May 1998, 11 Member States met the convergence criteria and thus formed the first wave of entrants which would go on to adopt the euro as their single currency. These were Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, The Netherlands, Austria, Portugal, and Finland. Denmark and the United Kingdom had ‘opted out’ from participating in the third stage of EMU, while Greece and Sweden did not fulfil all the criteria.
  • The ECB and the European System of Central Banks (ESCB) were established in June 1998, replacing the EMI, and on 1 January 1999 the third stage of EMU began.

Third stage: the euro is launched

On 31 December 1998, the conversion rates between the euro and the currencies of the participating Member States were irrevocably fixed. On 1 January 1999, the euro was introduced and the Eurosystem, comprising the ECB and the national central banks of the euro-area Member States, took over responsibility for monetary policy in the new euro area. This was the beginning of a transitional period that was to last three years and end with the introduction of euro banknotes and coins, and the withdrawal of national banknotes and coins. In 2000, the Council decided that Greece fulfilled the necessary conditions for the adoption of the single currency, and the country joined the euro area on 1 January 2001.

Money on paper only

While the euro replaced national currencies immediately, with the national currency units becoming sub-units of the euro, it initially existed only as scriptural or ’book‘ money. National currency banknotes and coins remained the means of everyday cash transactions. During the transitional period, it was the world of business and finance that began to use the euro in their everyday ‘cashless’ operations.

For the financial markets, this transition happened immediately – the ground was well prepared and trading in financial markets was exclusively in euro. For administrations and business, there was a longer transition period as they gradually switched their systems for accounting, pricing and payments over to the euro. For citizens, the most visible part of the transition was the appearance of dual pricing on labels in shops and petrol stations, etc. This was part of an extensive communication campaign to familiarise the general public with the euro and the coming introduction of banknotes and coins.

A new year and a new currency

On 1 January 2002, the biggest cash changeover in history took place. It was a challenge of unprecedented dimensions that involved the banking sector, cash-in-transit companies, retailers, the cash-operated machine industry, and the general public. Around €144 billion in euro cash was provided early by the national central banks to commercial banks (frontloading) and by these banks to retailers (sub-frontloading) to avoid bottlenecks in the supply chain. This meant that euro cash was widely available in all sectors in the first days of 2002. By 3 January 2002, 96% of all ATMs in the euro area were dispensing euro banknotes. And just one week after the introduction more than half of all cash transactions were being conducted in euro.

The cash changeover was completed within two months. National banknotes and coins ceased to be legal tender by the end of February 2002 in all Member States and earlier in some. By that time, more than 6 billion national banknotes and close to 30 billion national coins had been withdrawn, and for over 300 million citizens in 12 countries the euro had finally arrived.

>> Phase 1: the Werner Report

>> Phase 2: the European Monetary System

>> Phase 3: the Delors Report

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